What are the most important things you can learn from a failed startup? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.
I have been part of two startups that failed, and have watched several more that didn't take off.
These are key lessons from my perspective:
- Founders having skin in the game is necessary though not sufficient for success.
Monetary investment is one indicator but also how much time and attention one is willing to give the startup. If the startup is not the key priority for even one co-founder, the other(s) can only do so much since the in-going assumptions change when one or more co-founders check out.
This is unfortunately too common because founders need to work other jobs to get a living while they work unpaid on their startup. Failure or success turns on whether the job becomes more important than the startup.
- Founders with prior tight social links have been shown to be a high risk in research. My experience corroborates that finding.
I watched a startup S1 implode when a founder was too close to her co-founder, who was siphoning money off her and the company, but she was unwilling and perhaps unable to call him out on it. At any rate, she also turned a deaf ear when the team gave her proof of his misbehaviour. That did not end well.
There are exceptions. I am thinking of a very successful British smoothie brand founded by friends. When examined closely those instances show that the individuals had essential, complementary skills and they could work together professionally without letting their social ties get into the way too much.
- Testing assumptions is necessary. But how founders react decides if the startup sinks or survives.
Macro-data about market sizing is all well and good. To achieve anything, the startup has to target an addressable market and go after it. This means that the team must agree on some goals and the ways to get there. This in turn means the team should have necessary skills or have the ability to procure those skills. Markets and particularly technology may evolve rapidly putting all those assumptions under duress. This is why startups test and reject or pursue specific pathways to their strategic goals quickly.
Where the founders disagree on changes that need to be effected in their business model and dig their heels in, the startup is not likely to survive. This happened in startup S2.
This is also related to the next point.
- There is such a thing as too-early division of equity. There is also such a thing as no vesting schedule which is not wise.
In the story of startup S1, the co-founder siphoning off funds had no skin in the game by way of investment, but had negotiated a larger share of the equity pie. The founder who was the primary funder had a smaller stake. When the co-founder demonstrably could not deliver on the promises, it became an awkward conversation which she was not willing to have.
All founders are not created equal, nor do they add equal value. The founder here could have mitigated against this by attaching a vesting schedule to the equity. That was not the case either.
- Good governance is a state of mind. Not just to do.
Startup founders don't often think of governance as the soul of their organisation. Governance encompassesin an organisation. But governance thinking is also a litmus test of the founders' values and how they behave under duress.
This has been a common factor among all startup failures I have seen closely.
- Product-founder fit is as crucial as, if not more crucial, than product-market fit.
The startups that I have seen flounder are those where the founder or founders lack an obsessive interest in what they are building. It is a delicate balance though because that obsession should not be to the point of utter blindness to things not working out. This was the case in startup S2 where the co-founder with the biggest pie of the equity had no interest in the product category but plenty in the upside i.e. £££ to be made.
Goes without saying that the converse where the passion exists but a product doesn't also is going to fail. Unless the founder finds a way to translate their passion and obsessive interest into something many people in their target market will pay for.
- Distance is a challenge. Collocation is a solution that is hard to get right.
To save costs, founding teams often work from dispersed locations especially now that web access is cheap and near-ubiquitous.
In case of startup S1, too much money was spent on a nice office right away and getting everyone to work in the same open plan office. It didn't make a jot of difference to the outcomes which weren't coming as promised by the co-founders or early employees.
In startup S2, daily scheduled conversations and the use of project management tools online made it somewhat easier to keep moving in the same direction. These tools were not available when the startup mentioned above was being created. But some crucial mistakes took too long to deal with because, well, one of the founders made the startup a low priority and lack of a product-founder fit became a big challenge to motivation.
- Failure is never one thing; it is a clusterfuck. This sometimes becomes clear only in hindsight.
In case of startup S2, the pivoting needed for product-market fit made it clear that one of the co-founders will no longer be adding much value at all. The pivot was also removing several governance challenges which would be a good thing. One of the other co-founders had taken a job and was not really doing anything. But prior existing tight social ties between these two co-founders meant that they were unwilling to relinquish control, whether equity or strategy, in any form to the third co-founder. That was clearly unsustainable. Poof the startup went!
- You are more resilient than you think.
Outside the Bay Area, failures are still a hard-sell. But hey, nobody died! As long as we are alive, there is hope and there is now, hopefully, wisdom. This is by far the biggest lesson I would take away from failures.
Startup S1's female founder has thrived after a horrific year of panic attacks and depression as she lost all her life savings and had to declare bankruptcy. She reinvented herself with the help of her family and closest friends.
I should add that neither S1 nor S2 mentioned here was a Bay Area startup. Some of the others I am observing are Bay Area and India based. The motivations and bloopers of people creating startups seem to be quite similar across cultures.
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